Climate Governance Initiative Australia Newsletter February 2023

Climate policy continues to be front and centre, with Federal Treasury’s consultation on mandatory climate reporting closing shortly. With large, listed companies and financial institutions likely to report from the 2024-25 financial year, organisations will need to be prepared for swift implementation of an ambitious regime. Directors should check out our free webinar on 23 February on how to prepare for new climate reporting standards featuring NAB, Audit Committee Chair, David Armstrong MAICD, Chartered Accountants Australia New Zealand, Business Reform Leader, Karen McWilliams GAICD, and AICD, Head of Policy, Christian Gergis GAICD.

Our second newsletter of 2023 covers the AICD’s perspective on the Treasury consultation on mandatory climate reporting (including AICD’s liability concerns), highlights CGI’s latest resource for chairs on nature-related risks and opportunities, as well as new UK climate litigation against the board of Shell – the first litigation of its kind globally.

Latest on Federal Treasury’s mandatory climate reporting framework

The AICD is providing a detailed submission to Federal Treasury’s consultation on introducing mandatory climate reporting. The new regime is expected to initially apply to large, listed companies, financial institutions, and potentially a wider range of entities, with the mandatory requirements likely to apply for the reporting period from July 2024.

While Treasury’s paper does not put forward a detailed regulatory model, it makes clear the Government’s intention to align with the International Sustainability Standards Board (ISSB) framework as the emerging global reporting baseline (see here for more detail). The development of ISSB standards is moving quickly with the final versions expected to be issued around June 2023.

The AICD has expressed its support for an Australian reporting regime that provides greater clarity to directors on regulatory expectations, and supports the disclosure of high quality, comparable information to the market, based on a common baseline. At the same time, the AICD has consistently raised the need for liability settings to promote comprehensive disclosures, without creating or increasing litigation risk.

Last year we commissioned legal advice from Herbert Smith Freehills that outlined the legal issues with implementing the proposed international standards (upon which Australian standards would be closely based) and recommended the development of regulatory mechanisms to manage those risks.

Based on our engagement with legal experts, the AICD is of the view that given the significantly expanded scope, and granularity of disclosures likely to be expected in the final standards, litigation risks will be material, even for diligent directors and corporations. To address these concerns, we recommend the development of regulatory mechanisms to manage these risks appropriately (e.g. a safe harbour for forward-looking climate statements and/or restricting enforcement to regulators).

Nonetheless, this is a contested issue and we will continue to engage with the government, members and others stakeholders to achieve a balanced outcome.

A further Treasury consultation is expected post-stakeholder feedback. Legislation would be required later this year to meet the anticipated timing.

How to prepare for new climate reporting standards – webinar, 23 February

With the path to mandatory climate reporting in Australia becoming clearer, and increased pressure on organisations to disclose their climate impacts and exposure to risk, directors need to understand what is coming quickly down the regulatory pipeline.

In collaboration with Chartered Accountants Australia New Zealand, the AICD is holding a free webinar on 23 February to prepare directors for mandatory climate reporting.

The webinar will cover:

• Relevant international reporting frameworks (Taskforce for Climate-related Financial Disclosures, ISSB)
• Existing climate-related disclosures in Australia
• Federal Treasury’s current consultation on climate disclosures
• Key implications for directors, including how to manage legal risks like greenwashing and signing off on reports
• What should my board be doing to prepare?

The Chairperson's Guide to Valuing Nature

According to the World Economic Forum’s Nature Risk Rising Report , approximately half of the world’s GDP depends moderately or highly on nature and it would not be possible to sustain the other half without it. Nature risks will be increasingly prominent, particularly against the Global Diversity Framework adopted at COP15 (which Australia took a lead role in developing) that committed to nature-related reporting for large companies and financial institutions. This bolsters the work of the Taskforce on Nature-related Financial Disclosures (TNFD), which is due to release its framework this September for corporates and financial institutions to report and act on nature-related risks and opportunities.

To assist directors, the Climate Governance Initiative (CGI) (in collaboration with Deloitte and the World Economic Forum) launched The Chairperson’s Guide to Valuing Nature with a panel session at Davos. This new paper explores risks and opportunities related to nature loss and outlines key steps for board chairs to incorporate nature into business strategy. The paper covers:

• Why nature is important
• How to take stock of current business activities
• Actions boards can take to address nature-related risks
• How to unlock the hidden value of nature

Other climate governance news

• Shell’s board sued over lack of climate ambition ( The Business Times ) – Environmental law firm ClientEarth is bringing a shareholder lawsuit under the UK’s Company Act against Shell’s board, alleging that the board is in breach of directors’ legal duties by not properly managing climate risk. ClientEarth alleges Shell’s strategy is inconsistent with the Paris Agreement. The lawsuit, which also alleges the directors failed to comply with a 2021 Hague ruling to reduce emissions, is being supported by institutional investors. The High Court will now decide whether to grant ClientEarth permission to bring the claim.
  
• Navigating the rising tide of greenwashing ( MinterEllison ) – This new guide assists organisations to navigate ‘greenwashing’ risks while setting their emissions reduction targets and promoting their sustainability credentials. Common greenwashing risks include greenhouse gas emissions reduction targets, ‘truth to label’ terms (e.g. “sustainable”, “green”), enterprise branding in advertising, and financial reporting and disclosure.
• Labor’s unlimited use of carbon offsets could lead to rise in emissions, report says (The Guardian ) – A report commissioned by Australian Conservation Foundation and Solutions for Climate Australia, argues most land-based offsets have failed to deliver genuine, new or permanent emissions reductions. Carbon offsets are a key feature of the Government’s proposed Safeguard Mechanism reforms , where around 215 of the nation’s largest industrial emitters will be required to cut emissions to help meet emissions reduction targets.
• Less than 1% of companies have presented credible climate transition plans: Carbon Disclosure Project (CDP) (ESG today ) – Only 0.4% of companies have disclosed credible climate transition plans, according to a new CDP report , assessing the state of climate-related reporting from more than 18,600 companies across 135 countries. Over one-third of all disclosing organisations reported having board-level oversight of climate transition plans.
• Financial Sector Hub ( CGI ) – The Global CGI, in collaboration with McKinsey, has launched a new hub for financial sector-specific insights in the form of webinars and events for directors of financial institutions to provide meaningful climate discussions in the boardroom. Register here for the first webinar that will explore the Net Zero Transition Finance Opportunity on 9 March 2023.